Credit still beats deposit growth

Bank credit grew 16.9 per cent and deposits by 13.4 per cent year on year in the fortnight ended November 16. Banks disbursed new credit worth Rs 34,771 crore in the fortnight, while they lost deposits worth Rs 25,789 crore. In the previous fortnight, they'd accumulated new deposits worth Rs 47,211 and disbursed new credit of Rs 43,813 crore.

The Reserve Bank of India has projected the year's deposit growth at 15 per cent and revised the target of credit growth to 16 per cent from the earlier 17 per cent. In the first one-and-a-half months of the present quarter, bank deposits fell Rs 1,005 crore and credit growth was Rs 85,138 crore, RBI data showed.

Last year in the same period, banks had accumulated Rs 21,820 crore and disbursed new credit of Rs 39,002 crore. The credit-deposit gap has widened this year. This is one reason banks are borrowing a little over Rs 1 lakh crore daily's from RBI's liquidity adjustment facility.

Shubhalakshmi Panse, CMD, Allahabad Bank, said, "The widening credit–deposit gap is not alarming. Credit growth over a year's basis is looking high as last year, there wasn't much credit demand due to a slowdown. Most public sector banks have offloaded the high cost deposits; therefore, the deposit growth would be less as compared to advances."

The country's largest lender, State Bank of India, has been facing a problem of excess liquidity. According to Pratip Chaudhuri, chairman, the bank has accumulated deposits of about Rs 1 lakh crore this financial year and was able to deploy only about Rs 40,000 crore, leaving about Rs 60,000 crore of extra liquidity with the bank.

"People have withdrawn more cash this festival season (making the liquidity situation tight) than we were expecting" RBI deputy governor H R Khan told reporters a couple of days earlier, at the sidelines of an event here. He said a slight reduction in deposits and increase in advances also helped create the liquidity pressure.

Currently, banks are offering an interest rate of 7.5 to nine per cent for deposits of a year and above. For less than a year, they are offering 6.5 to eight per cent, making it an unattractive proposition for depositors at a time when inflation is high.

"There is a need to provide better returns to depositors," said M Narendra, chairman and managing director, Indian Overseas Bank. Depositors are instead investing in gold and real estate, where the rate of return is much higher. Higher demand has led the gold price to increase about 12 per cent in the past year, while RBI's all-India housing price index grew 24.1 per cent last year.

"Credit (demand) always picks up in the second half, which is the busy season," Narendra said, adding a reason why deposit growth was lagging was that both public and private savings are coming down, a function of many things, including government surplus. "This is a temporary problem and it will improve with the growth of the economy," he said.